Canada: Bill C-228: The Pension Protection Act – It’s Time to Prepare

Published on Apr 24, 2023

Bill C-228, An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985, or the Pension Protection Act (PPA) in short, passed its third reading at the Senate, which means it only awaits Royal Assent to become law. Although the PPA provides for a four-year transition period after Royal Asset before the amendments to the Bankruptcy and Insolvency Act, (BIA) and the Companies’ Creditors Arrangement Act (CCAA) will apply to existing defined benefit pension plans, the effects of an expanded “super-priority” over unfunded pension liabilities may already be seen among sponsors of defined benefit pension plans and their lenders.


Protection for certain pension liabilities of insolvent employers was first introduced to the BIA and CCAA through amendments that came into force in 2009. The amendments covered amounts deducted from employees’ remuneration but not remitted to the pension plan, contributions owed by employers in respect of the normal cost of benefits under the plan, and contributions owed to defined contribution pension plans and pooled pension plans. Under s. 60(1.5) of the BIA and s. 6(6) of the CCAA, respectively, the court can only approve a BIA proposal or CCAA plan if it provides for payment in full of those amounts. In addition, ss. 81.5 and s. 81.6 were added to the BIA to create a priority secured claim in respect of those unpaid amounts in a BIA receivership and bankruptcy, respectively.

The 2009 amendments did not address special payments or other amounts in respect of unfunded liabilities, or solvency deficiencies of defined benefit plans. This omission was intentional, as there was concern about the uncertainty that would arise by including liabilities for solvency deficiencies which, by their nature, are difficult to calculate and challenging to predict. However, political pressure to include them increased in light of certain high profile insolvencies that resulted in reductions in pension entitlements for thousands of Canadian employees and pensioners.

Key Aspects of the PPA

The PPA began as a private member’s bill that has now passed through both the House of Commons and the Senate with rare unanimous votes across all party lines. The PPA will result in the addition of special payments and any amounts required to liquidate any unfunded liability or solvency deficiency of the pension fund to: (a) the amounts that must be paid under a BIA proposal or CCAA plan, and (b) the liabilities that are granted a priority secured claim in receiverships and bankruptcies under the BIA. In the case of BIA proposals and CCAA plans, there remains an exception where the applicable parties and pension regulator have otherwise agreed.

The PPA is intended to ensure that unfunded liabilities of defined benefit pension plans and corresponding pension entitlements rank in priority ahead of most creditors, including secured and unsecured lenders.

In addition, the PPA will amend s. 40 of the Pension Benefits Standards Act, 1985 (PBSA) to provide that in its annual report to each House of Parliament, the Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal pension regulator, must report on the success of federally regulated pension plans in meeting the prescribed funding requirements and the corrective measures OSFI has taken to deal with any pension plans that are not meeting the funding requirements.

Timing and Transition

The Cabinet does not provide a timeline for Royal Assent. In cases like the PPA where regulations do not need to be drafted, Royal Assent is expected to be given within a few months, although there is no guarantee. Once in force, the transition provisions delay the enforceability of the BIA and CCAA amendments for four years in respect of pension plans that exist the day before Royal Assent. If, however, an employer sponsors a new defined benefit pension plan on or after the date of Royal Assent, the amendments would immediately apply to that employer and the new plan.

Implications of the PPA

In making loans, secured lenders desire a level of certainty regarding obligations that rank ahead of them. The amount of an unfunded liability of a defined benefit pension plan is uncertain, as it depends on a set assumptions that only crystallize at the time that an insolvency proceeding is commenced. Concerns have been expressed that the PPA will make borrowing more difficult for sponsors of defined benefit pension plans, especially plans with unfunded liabilities. The lack of certainty in the potential pension unfunded liability may affect the availability of financing to defined benefit plan sponsors, the determination of appropriate reserves will be less predictable, and the pricing of any such financing will reflect the increased risk to lenders.

The four-year transition period is not a grandfathering provision, so sophisticated financing agreements have already begun to reflect such lender protections. The concern is that if there is an intervening insolvency filing and a case lasts past the four-year transition deadline, a lender could find itself in the new regime even if its original maturity date was before the end of the transition period.

In addition to traditional financings, the PPA will in time impact interim financing, or debtor-in-possession (DIP) loans, that are essential to successful restructurings under the BIA and CCAA. Currently, the terms of interim financing prohibit the debtor employer from funding special payments under any circumstances. Adjustments will need to be made for loans intended to fund BIA proposals or CCAA plans.

Although concern had been raised by pension and bankruptcy law experts that multi-employer pension plans could become liable for any pension deficits upon the insolvency of a participating employer, legislators have been clear that multi-employer plans fall outside the scope of the PPA, as the intention is not to create new liabilities, but rather deal with any defined benefit pension liabilities that employers are legally responsible for. This clarification, together with the potential restrictions on borrowing, may influence a sponsor of a defined benefit pension plan to wind-up its pension plan or transfer its past and future assets and liabilities into a multi-employer pension plan.

Preparing for the PPA

Stakeholders should prepare for the potential consequences of the PPA on defined benefit pension plans.

Plan sponsors should review and potentially revise the pension plan’s strategy in respect of funding, investment and risk management in contemplation of the PPA amendments. These considerations should be reviewed with the appropriate advisors and the supporting plan documentation should be updated accordingly.

Lenders may wish to seek additional collateral, protective covenants, enhanced reporting requirements, and increased reserves. In addition, financing agreements may further restrict the establishment or acquisition of new defined benefit pension plans or make any existence of or increase in a solvency deficiency, as determined by an actuarial report, an event of default under the agreement. Lenders may also require annual actuarial reports. The existence of any defined benefit pension plans should be addressed in the negotiation of a new or renewed loan or credit agreement both by borrowers and by lenders.

Looking Forward

Goodmans is keeping ahead of this development. For further information concerning the PPA and its implications, please contact any member of our Employment, Pensions and Executive Compensation Group, Banking and Financial Services Group, or Restructuring Group.